Leaving the market or reducing the coverage?

Anne Corcos, François Pannequin and Claude Montmarquette

CIRANO Working Papers from CIRANO

Abstract: This study develops an experimental analysis addressing the premium sensitivity of the demand for insurance accounting for risk attitudes, including risk-loving. Our contribution disentangles the conditional demand (the non-null demand for insurance) from the propensity to buy insurance. Our research shows that the contraction of the global demand for insurance induced by the raise in unit prices and fixed cost is primarily due to policyholders exiting the insurance market rather than reducing their levels of coverage. However, contrary to the theoretical predictions, an increase in the fixed cost has effects only on the risk lovers’ behavior. The stability of the conditional demand is robust to changes in insurance contracts and individuals’risk attitude. These results suggest that the decision about insurance may boil down to an “all or nothing” choice. In line with the theory, risk lovers express a lower global demand for insurance than risk-averse subjects and are the first to leave the insurance market when the premium (unit price or fixed cost) is prohibitive. Implications regarding public and economic policies are discussed. As a by-product, our experimental design enables to test and reject the assumption of inferiority of the risk averters’ demand for insurance.

Keywords: demand for insurance; conditional demand; propensity to buy insurance; risk attitude; two-part tariff; experimental study (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
Date: 2016-05-06
New Economics Papers: this item is included in nep-exp, nep-ias, nep-pr~ and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:cir:cirwor:2016s-26

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